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What’s Netflix’s Strategy for China?

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Netflix in China

Netflix (NFLX) indicated in its 3Q16 earnings letter to shareholders that instead of launching its own service in China (FXI), it plans to license its content to existing SVOD (subscription video on demand) providers in China.

Netflix also stated that it expects a “modest” revenue from its content licensing agreements in China. Netflix noted that one of the reasons that it is reluctant to launch its service in China has been the country’s challenging foreign regulatory environment.

As English language content becomes popular in China, media companies in the United States are increasingly looking at the Chinese market. One reason for the popularity of English content in China has been the country’s rising Internet penetration.

According to a January 2016 report from the China Internet Network Information Center, “China had 668 million Internet users” and Internet penetration of 48.8% in June 2015.

According to the same report, and as indicated in the graph above, online video users made up 461 million, or 69.1%, of all online users in June 2015, up 2.3% over 2014. At 76.8%, mobile video users were significant contributors to the consumption of online video content in China.

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Impact of strict foreign regulations in China

Netflix’s (NFLX) original programming could face censorship issues in China. The Chinese government has already censored Game of Thrones, a popular series on Time Warner’s (TWX) HBO. In 2015, the Chinese government also delayed the launch of the third season of Netflix’s original political thriller, House of Cards. Before allowing it to be streamed, China’s government reviewed it for any objectionable content.

The Walt Disney Company (DIS) had partnered with Alibaba (BABA) to operate DisneyLife, an OTT (over-the-top) content service in China. In April 2016, however, DisneyLife was suspended in China at the behest of Chinese regulators. Also in April, Chinese regulators put a stop to Apple’s (AAPL) online book and movie service in the country.

Piracy is another issue that Netflix could face in the Chinese market.

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